Thursday, April 24, 2014

The soap opera that is PIMCO is making me nuts. Between the principal participants (Bill Gross and Mohammad El-Erian) acting like high school kids about their breakup and the financial press acting like 7th graders I am ready to scream. Who cares? If I see one more breathless host of a financial news show ask one more "expert" "What do you think about what he said about the other guy?" I might ban all TV's in the office. Why don't we just cut to the chase and schedule both men on Dr. Phil and let them drool all over themselves with endless talk about their feelings. Stop the madness and act like grown-ups. If I had any money with either of these guys I would seriously rethink it.

On another note; the municipal market has just undergone a brush with the law of unintended consequences thanks to the underwriters (Barclay's) who decided to restrict the recent 3.5 billion Puerto Rico financing to denominations of 100,000 or more. Combine this with a hot deal and you will find that most of the orders were from hedge funds and other short term investors looking for a quick buck, not a permanent investment. The bonds rose in price the next day but quickly fell to below issue because there were so many sellers. Currently the price for the bonds is about 4 points lower than a month ago and the larger buyers have no marketability. Individual investors have been the main stay of the Puerto Rico market for decades because of the state tax exemption but they will usually buy less than 100,000 at a time. Now the secondary market in Puerto Rico debt is frozen because of the overhang of the recent deal which large investors would sell but can't. Lesson to be learned is to be very careful when someone tries to dictate conditions which should be set by market forces rather than a well meaning idiot.

Thursday, April 3, 2014

The current debate about High Frequency Trading (HFT) is Wall Street in a nutshell. A little history that I have observed during my career is in order. When I entered the business in 1972 commissions were fixed meaning Wall Street had a monopoly that forced every investor to pay the same commission to every firm when they executed an order. In 1975 this legal monopoly came to an end with the advent of negotiated rates for stock trades (May 1, 1975). Lost in all the hue & cry in re this new system was that orders were still routed through the fixed exchanges, mostly the New York Stock Exchange (NYSE), and the American Stock Exchange (AMEX or "the curb"). This was the most rigged system in the world, because a handful of "specialists" had a monopoly right to trade certain stocks and they were allowed to trade for their own account while they were executing orders for buyers and sellers. In any other business this would be criminal. Once electronic markets were developed, the monopoly power of the NYSE was broken and investors were matched up through computers without the specialist being able to cherry pick the market.

Today's markets are much more efficient and cheaper than anything that existed since the exchange moved indoors from under the buttonwood tree.Yet, it seems that Wall Street has not met a system they didn't want to game and somehow give themselves an unfair advantage. What is occurring today is a group of traders intercepting orders from investors and running ahead to scoop up the available stock to resell at a higher price to the original investor. It borders on the criminal... it is wrong... it needs to be stopped. If you come across anyone defending this type of activity steer clear. What they are defending is Wall Streets right to rig the game and deny the investor a fair and open market.

Wednesday, April 2, 2014

It is no wonder that "Wall Street" is reviled on "Main Street". Every day brings a new revelation of cheating on the part of banks. First we had investments tied to the LIBOR rate and then we find out that the banks who set the rate were conspiring with each other to maximize their profit at the expense of their clients. We are currently wading through the same scenario with FOREX or foreign exchange rates. Add to this the manipulation of the commodity markets and the energy grid plus the recent allegations that high frequency traders have an unfair advantage and we see that nothing has changed much after the 2008 meltdown. The only thing that could make it worse is if AIG started running TV ads telling America how wonderful they are. OH wait......

I believe in Wall Street; the US capital markets are a national treasure. At best it is the engine which propels economic growth and advances all segments of society. It enables us to build infrastructure, including  schools, roads, bridges and highways. It helps companies secure the financing for expansion thereby creating jobs and opportunities for the whole country. We have always dreamed big dreams and Wall Street can make that happen. It is time for all of us in the industry insist on kicking out the manipulators and demand that the regulators do their jobs properly.